It is early July 1914 and the financial markets are calm. Traders assume that the recent assassination in Sarajevo is a localised event that will have no lasting ramifications. There have been disturbances aplenty in the Balkans since the turn of the century and the expectation is that the death of Archduke Franz Ferdinand will be, like all the others: a footnote in history.
It was only later in the month, after Austria delivered its ultimatum to Serbia, that the markets woke up to the threat of a war involving the great European powers. Bond yields rose; there were fears that debts would go unpaid. The stock market in London closed in early August and did not reopen until early the following year. In Britain, the Bank of England and the Treasury managed to avert a full-scale panic but things were never quite the same again.
Becoming Relatively Stronger
Gerard Lyons, once chief economist at Standard Chartered before becoming an adviser to London's mayor, Boris Johnson, has a rather more upbeat view. While not playing down the many risks – including growing inequality and climate change – Lyons argues in his new book, The Consolations of Economics, that the global economy could eventually emerge stronger from its recent travails.
Lyons makes a strong case, and he has history on his side. The global economy has regenerated itself before and it can do so again. It is premature to say that the new wave of innovations will have less impact on productivity than those identified by Gordon as having a transformative role in the first half of the 20th century. It is certainly not too early to identify a reconfiguration of the global economic balance of power: with Asia, Africa and Latin America all becoming relatively stronger while Europe and North America become relatively weaker.
But the lessons of the 1914-45 period are that this rebirth can be a long and painful process. And it will only happen if the fundamental weaknesses of the model are addressed. The mood now is like that of the 1920s – a hankering for the lost days of Edwardian summer.
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